Greek crisis deepens

Debt crisis: Greek euro exit looms closer as banks crumble

A tsunami of capital flight from Greece threatens to overwhelm the authorities, forcing the country out of the euro before fresh elections in June.

By Ambrose Evans-Pritchard, International business editor

The Telegraph,

16 May, 2012

Economists warned that the Greek financial system could crumble within weeks or days unless the European Central Bank steps up support.

President Karolos Papoulias told party leaders that banks had lost €700m in withdrawals on Monday alone as citizens rush to pre-empt capital controls and a much-feared return to the Drachma.

He cited central bank warnings that "great fear" might soon escalate to panic. The leaked details lend credence to claims that capital flight by both savers and firms have reached €4bn a week since the triumph of anti-bailout parties on May 6.

Steen Jakobsen from Danske Bank said outflows are becoming unstoppable, not helped by open talk in EU circles of `technical’ plans for Greek withdrawal.

"This has a self-fulfilling prophecy built into it and I don’t think we can get to June. The fuse is burning and the only two options now are a controlled explosion where Germany steps in to ensure an orderly exit, or an uncontrolled explosion," he said.

The growing alarm comes as judge Panagiotis Pikrammenos was picked as Greece’s caretaker leader until the next vote on June 17. Polls show the Left-wing Syriza leader Alexis Tsipras emerging as clear victor.

Mr Tsipras has vowed to tear up the EU-IMF bail-out `Memorandum’, exhorting German Chancellor Angela Merkel to "stop playing poker with the lives of people". The Greek impasse has rattled markets, with the FTSE 100 down 0.6pc to 5,405 yesterday. Spanish lender Bankia fell 11pc in Madrid.

Gold tumbled $17 to a ten-month low of $1,540 on dollar strength.

The crisis is replicating the pattern of fixed-exchange ruptures through history. Britain was forced off the Gold Standard in 1931 after pay-cut protests in the navy triggered capital flight.

Greek banks have lost 30pc of their deposits since late 2009. The total fell to €171bn in March. "The surprise is that there is still so much left. I can’t believe it will stay much longer," said Simon Ward from Henderson Global Investors.

The ECB is holding the line with an estimated €100bn of Emergency Liquidity Assistance (ELA) for lenders, channeled through Greece’s central bank. Supplicants must pawn their loan book in exchange. "The risk is that banks will run out of collateral since these are low quality assets with haircuts of 50pc or more. The ECB could relax the rules but they would have to take an active decision to do so," said Mr Ward.

JP Morgan said Greek banks have already exhausted their collateral. A refusal by the ECB to ease rules would amount to expulsion, forcing Greece "to issue its own money."

The ECB said it had stopped routine operations with certain Greek banks with depleted capital buffers, but underscored that they are still able to access the ELA scheme.

There is already a political storm in Germany over "junk collateral", aswell as anger over the Bundesbank’s €645bn exposure to Club Med debtors through the ECB’s internal `Target2’ payments nexus. Mr Ward said it would be hard to justify to German taxpayers why the Bundesbank should lend more to "austerity-resistant Greeks" so that they can squirrel money abroad.

Julian Callow from Barclays Capital said the ECB risks grave contagion if it lets go of Greek banks. "We have reached the point where the ECB needs to come in with massive intervention and outright quantitative easing," he said.

Slow capital loss from Club Med is showing up in the ECB’s Target2 data. The central banks of Italy and Spain have built up liabilities of €279bn and €284bn, partly reflecting bank withdrawals. This is owed to Germany, Netherlands, Luxembourg, and Finland.

Italy’s banking lobby said foreign deposits at Italian banks were down 20pc in March. The good news is that the Libor-OIS spread -- the "stress gauge" for banks -- has not risen in this latest spasm of the crisis, suggesting that Club Med deposit flight remains modest for now. That could change fast if a Greek exit shatters the sanctity of monetary union